EFAB Report
EFAB

Robin L. Wiessmann
Chair
Richard B. Gdtman
Vice Chair
Herbert Barrack
Executive Director
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FINANCING THE REMEDIATION OF HAZARDOUS
 WASTE SITES UNDER THE NORTH AMERICAN
            FREE TRADE AGREEMENT
This report has not been reviewed for approval by the
U.S. Environmental Protection Agency; and hence, the vievrs
and opinions expressed in the report do not necessarily
represent those of the Agency or any other agencies in the
Federal Government.
Geoige A. Reftda
RcfcenaH. Savage
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                   April 1994

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                                  APR  29 
  Honorable Carol M Browner
  Administrator            t
  U.S. Environmental Protection Agency
  Washington, D.C. 20460

  Dear Administrator Browner:

      On behalf of the Environmental Financial Advisory Board (EFAB), we are very
  pleased to transmit to you the EFAB Report, "Financing the Remediation of Hazardous
  Waste Sites under the North American Free Trade Agreement"  The Agency asked the
  Board to examine the financing of Mexican border remediation efforts, an important
  issue in the discussions between the U.S. and Mexico on the implementation of NAFTA.

      The Board believes several principles will facilitate the remediation of hazardous
  waste disposal along the Mexican border  first, those who pollute must pay for their
  pollution; second, Mexico should continue its enforcement efforts, which have been
  impressive over recent years and should lead to further identification of the polluters
  which generate hazardous waste; and third, a finance program to remediate sites should
  be developed which would have strong incentives for polluters to undertake the
  remediation, and strong disincentives for doing otherwise.  In the report we have
  structured a finance program to consist of: (1) long-term loans from the newly created
  North American Development Bank to identified polluters, (2) the establishment of a
  General Remediation Fund financed by polluters not causally linked to individual sites,
  (3) the creation of tax increment districts and incremental tax proceeds, and (4) the
  creation of a series of financial incentives for private sector polluters to undertake
  remediation of sites to which they either can or cannot be causally linked.

      The above approach strives to develop an effective system of rewards and penalties
  whereby polluters will have the incentive to work with, rather than against, the
  government  We believe this approach would be useful in the work of the newly created
  binational agencies, i.e.  the Border Environmental Cooperation Commission and the
  North American Development Bank.  The Board offers its assistance to the
  Administrator in your capacities as a director of these agencies, and we are also
  available at your convenience to discuss this report and to provide any further analyses
  you may require.
  J&obin L. Wiessmann                     Herbert
 /Chair, Environmental                    Executive' Director, Environmental
-  Financial Advisory Board                 Financial Advisory Board

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                           Report of the
                               *
           Environmental  Financial  Advisory Board
                   t
                               of the

       United  States  Environmental Protection  Agency
         Financing the Remediation of Hazardous Waste Sites
                             under the
               North American  Free Trade Agreement
      Pursuant to the discussions between the Government of Mexico and the
Government of the United States concerning the implementation of the North
American Free Trade Agreement (NAFTA), the Administrator of the
Environmental Protection Agency (EPA) requested the advice and
recommendation of the Board regarding the financing of remediation efforts
at hazardous waste sites along the Mexican border. The Board delegated this
request to the International Committee ("the Committee").  Although there is
no reason why the principles described in this report could not be applied to
the United States' side of the border, the Committee's comments are directed
toward remediation efforts in Mexico.

      On November 19,1993, the Committee met in Washington, D.C, and
received a presentation from EPA staff regarding hazardous waste conditions
in Mexico, Mexican laws regarding the disposal of hazardous waste, and the
status of compliance with such laws.

      There are three principal sources of hazardous waste along the Mexican
border.  Mexican industry, maquiladoras, and what might be termed casual
generators.  Maquiladoras are assembly plants, many of which are American-

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owned, which receive pans manufactured in the United States, assemble them,
and return the finished product to the United States. ("Maquila" is a Spanish
term which originally referred to that portion of flour paid to a miller for
milling a farmer's grain; more recently, it has loosely come to mean the
process of sending out work.)  By the term "casual generators", is meant the
plethora of filling stations, garages and other light industrial operations,
which may or may not be licensed, which use materials which, when disposed
of, constitute hazardous waste.

      Mexico has adopted a series of strict hazardous waste disposal
regulations and standards.  It has also adopted strong administrative sanctions
to enforce them. Fines may be imposed on a daily basis for non-compliance;
and, in extreme cases, an operator's business license may be revoked. In 1988,
new measures were instituted which allow for plant closings upon failure  to
pass industrial inspection.  Conditions for reopening plants are formal and
include written acknowledgment of the violation and submission and approval
of a remediation proposal by the National Institute of Ecology.  In many cases
surety bonds are required to be posted to secure clean-up or correction of
violations.
 
      There are approximately 2,000 maquiladoras in Mexico. A 1991 survey of
1,450 of such facilities by the US General Accounting Office found that some
800 were producing hazardous waste but that only 446 were registered at that
time with the Mexican Government.  Mexican law provides that hazardous
waste generated in the maquiladora industry must be repatriated to the
country of origin of the raw materials. Thus, to the extent that maquiladoras
import hazardous substances from the United States, they are required under
Mexican law to repatriate them. The La Paz Agreement of 1983, to which both
the United States and Mexico are signatories, obligates the U.S. to accept return
of hazardous waste generated from raw materials which originate in the U.S.
and are shipped to maquiladoras in accordance with U.S. regulations.

      Lawrence I. Sperling, Senior Attorney-Advisor with the International
Enforcement Program in the Office of Enforcement at EPA, reported that over
the last three years, increasing cooperation has developed between  EPA and its
Mexican counterpart, the Secretariat for Social Development (SEDESOL). The

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Administration of President Carlos Salinas de Gortari has dedicated a
                                **
substantial amount of both human and financial resources to a massive
enforcement effort especially along the border. To expand and improve
enforcement activities, Mexico established, in 1992, an office of Attorney
General for the Protection of the Environment within SEDESOL

      The enforcement efforts of SEDESOL over the last few years have been
impressive. In 1982-84, slightly over 1,000 industrial inspections were
conducted in Mexico.  In the period, 1991-93, well over 11,000 such inspections
were made. Of the 4,580 industrial inspections conducted in 1992, 3,963 resulted
in citations for non-compliance. Of these, 3,144 resulted in fines or other
enforcement actions, 714 resulted in temporary or partial shutdown orders,
and 105 resulted hi the permanent shutdown of facilities.  The EPA staff have
expressed a high degree of confidence hi SEDESOL's enforcement  efforts and
have praised the high degree of cooperation between the two agencies.

      The Committee members were most interested hi the comments of the
EPA staff because they believe that without strong statutes and well enforced
sanctions all other efforts to control and dispose of hazardous waste will
ultimately be fruitless.
                                                                *
      In considering the problem of enforcement and the identification of ,
polluters responsible for specific contaminated sites, the Committee divided
the issue into two major natural categories. They are:

      Category A - contaminated sites where one or more polluters could be
causall  linkd to the contamination at such site.
      Category B - ^^flp^flffid -sites where no specific polluters could be
causally linked to such sites.

      In considering the problem of financing remediation efforts for
contaminated sites, the Committee adopted a series of seven principles. The
first two principles relate to the issue in general.  They are:

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      *  In accord with the principles of the Stockholm Convention of 1972,
      those who pollute must pay for their pollution.

      *  Enforcement action should lead to the identification of the polluters
      which generate hazardous  waste.

      The Committee then adopted two principles which should apply to
Category A sites where specific polluters can be causally associated with
specific sites.  They are:

      *  The principal private sector polluters should be given the first
      opportunity to remediate, assuming such remediation is approved by
      SEDESOL

      *  If a polluter undertakes remediation in good faith, government
      should support and facilitate such efforts to the greatest extent possible
      short of public subsidies.

      Finally, the Committee adopted three additional principles to be applied
in Category B  circumstances where no specific polluter(s) can be causally
associated with particular sites. These principles are as follows:

      *  In circumstances where particular companies are known to  use or
      produce hazardous substances, but where they can not satisfactorily
      account for the disposal of such materials, then these polluters should
      be required to pay into a General Remediation Fund (the Fund), which
      should be created for this specific purpose.

      *  Polluters, which cannot properly account for the disposal of their
      hazardous wastes, should be required to pay into the Fund based on the
      quantity of hazardous substances used or produced in their businesses
      and the number of years such firms have been in business at their
      current sites.

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      * The Fund should be used in conjunction with the other financial
      incentives described below to remediate Category B contaminated sites
      which cannot be causally linked to specific polluters.

      In accord with the above principles, the Committee recommends that a
finance program for the remediation of hazardous waste sites be created
which incorporates  both carrots and sticks, i.e., strong incentives and strong
disincentives, and also provides for the financing of site remediation where a
particular polluter cannot be tied to a particular site.

      The Committee believes that both strong incentives and strong
disincentives are necessary to bring the private sector into the remediation
process. Traditional remediation efforts have historically depended on the
absolute identification of polluters and the establishment of a causal link
between specific polluters and specific sites. This process can be extremely
time consuming, costly and difficult. It may be impossible in many instances.
Where it is impossible, an alternative remediation facility should be created, as
described  below.  But  even in these Category B circumstances, incentives  and
disincentives should be created to induce the participation of the private
sector to the maximum extent possible.

      hi Category A circumstances, where specific polluters can be causally
linked to specific contaminated sites, the Committee believes it would be most
effective to design,  at the onset, a program which encourages private sector
polluters to  come forward and to work with the government in a cooperative
effort to remediate sites.  The Committee feels strongly that, if both the system
of rewards and penalties is strong enough, polluters will have the incentive to
work with the government rather than against it.
CATEGORY A SITES
      For Category A sites, bearing in mind the beneficial effects which a
well-designed program can have on the process of identifying responsible and

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cooperative polluters, the Committee recommends a program containing the
                                *
following four elements:

    '   1) If identified polluters will not. undertake remediation efforts in a
timely manner, then the Government of Mexico, or any appropriate political
subdivision, should immediately undertake such efforts to the end that the cost
of such remediation efforts be levied against the offending polluter in a
manner in which such costs are immediately due and payable.  In addition to
the normal judicial procedure under Mexican law for collecting such sums,
additional sanctions, such as fines for non-payment and the temporary closure
of the polluter's facility until such time as the debt is discharged, should also
be considered.

      this element constitutes the disincentive, or stick, approach.  Under this
alternative, polluters can expect to pay considerably more for remediation
than if they had undertaken it themselves.  This statement is in no way meant
in derogation of the Mexican government.  It is simply a fact of life that
whenever public funds are involved, in any country, the time, effort and
expense of undertaking  projects increases significantly because of the need to
observe all of the appropriate safeguards of public funds.  The other
disincentive factor, of course, is that the polluter will be required to pay
immediately for the remediation performed by the government as well as any
fines or penalties  which may be applicable.  If the polluter does not cooperate,
he will not be offered any financial incentives.

      2) On the other hand, if the polluter  undertakes, on its own, in good
faith, the appropriate remediation efforts and effectively remediates the
offending site to the satisfaction of SEDESOL, then the government should
extend certain financial assistance to the remediating polluter to facilitate
such efforts. In addition, remediating a site to the satisfaction of SEDESOL    ,
should also limit the polluter's legal liability for such site.  This constitutes the
incentive, or carrot,  approach.

      3) One form of financial assistance which could be extended is the
sponsorship or support of a loan to  the polluter from the North American
Development Bank (NADBank) which is being created pursuant to the NAFTA.

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In this regard, the NADBank should be encouraged to offer the longest possible
          v                      <
amortization period for such loans. If possible, terms as long as fifty to one
hundred years should be offered.  There are two reasons why such long
amortization periods are important.  The first is that it will simply reduce the
remediator's financial burden by lowering his annual payments.  The second
is that it will dramatically enhance the effect of the second form of financial
assistance described below. Moreover, it should be noted that there are recent
precedents for fifty to one hundred year terms in the international capital
markets which will undoubtedly be used to fund the NADBank's contemplated
borrowings.

      In addition, the NADBank should be encouraged to offer the lowest
possible interest rate, short of public subsidy, on such loans as well.  Under the
structure contemplated by NAFTA, the NADBank should be rated "AAA" by
international credit rating agencies.  If possible, such rates should be passed
along to polluters that remediate in good faith. This will be a major incentive
since few companies will be able to float long-term debt at AAA rates only on
the strength of their own credit.

      4)  A second form of financial  assistance would involve the creation of
tax increment districts in the environs of the site to be remediated. A tax
increment district is a financial instrumentality in use in many areas
throughout the United States.  It involves freezing the amount of real property
taxes paid to traditional governmental recipients of such taxes for property
within the district based on the levels of taxation prior to the creation of the
district. Thus, the traditional governmental recipients of such taxes suffer no
diminution of revenues.  On the other hand, as property values within the
district increase, the taxes paid with respect to the incremental value only   are
used for other purposes.

      In this case, it is proposed that the good-faith remediator be rewarded
with part of the benefit of his remediation. In specific, it is proposed that the
                                           r
taxes collected based on the incremental  value of real property in and around
remediated hazardous waste sites inure to the credit of the polluters that
undertook in good faith to remediate such sites. It is proposed that the
incremental tax receipts be paid to the NADBank to buy down the outstanding

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principal balance of the loan to the remediating polluter.  When the
remediator's loan is fully amortized, the incremental tax revenues can revert
to the appropriate government jurisdictions.

      Under such circumstances, the extraordinarily long amortization period
proposed for the NADBank loan to the remediating polluter assumes great
significance, since die longer the loan period, the more beneficial will be the
mitigating effects of .the tax increment revenues on the cost burden of the
remediating polluter. Assuming that a tax increment district would encompass
not only the site itself but also a substantial amount of adjoining property.
(which actually enjoyed significant economic benefits from  the successful
remediation), over thirty, fifty or even one hundred years, the incremental
tax revenues from such properties should dramatically reduce the remediator's
financial burden. Even small  increments in tax revenues will, over a fifty to
one hundred year period, drastically reduce the remediator's loan.
CATEGORY B SITES
      For Category B sites, involving polluters who cannot be causally linked
to specific sites, the Committee's recommends a program containing the
following four elements:

      1) A General Remediation Fund should be created under the auspices of
the NADBank.  The Fund should be the primary financial resource for the
remediation of Category B sites. Polluters which cannot properly account for
the disposal of their hazardous wastes should be compelled to pay into the Fund
based on the estimated amount of hazardous waste they have produced over
time.  Payment into the Fund constitutes the stick, or disincentive.
                                                                     i

      2) Polluters which  are required to pay into the Fund should be offered
incentives to more actively participate in the  hazardous waste site remediation
process. This is especially true of polluters which are required to make
substantial payments into the Fund.  In these cases, a polluter should be
offered the opportunity to take the responsibility for remediating a particular
                                    8

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site, regardless of the fact that such polluter cannot be causally linked to sucjfr
                                 *
site. This is where the carrots, or incentives, come in. There are four
proposed incentives:

            A)  The first incentive would be that, once the polluter and  .
      SEDESOL have agreed on the scope of work to be done at a particular site
      as well as the estimated costs associated with the agreed upon scope of
      work at such site, those costs would be divided into two components. The
      first component would be for the account of the polluter, which is the
      amount the polluter was required to pay to the Fund. The second .
      component would be for the account of the Fund.  This would be the
      balance of monies needed pursuant to the agreed remediation cost
      estimate. The Fund's component of the cost would be expressed in
      absolute dollars (pesos) not in a percentage.  Thus the Fund would be
      required to pay X dollars regardless of actual cost. Thus, if, because of-
      private sector efficiencies, the polluter were able  to accomplish the site
      remediation to the satisfaction of SEDESOL at a cost below the estimate,
      the polluter would be able to reduce its own contribution on  a dollar for
      dollar basis.

            B) The second incentive would be to offer the polluter who takes
      responsibility for the remediation of a Category B site  the opportunity to
      finance his component of the remediation cost through the  same long-
      term loan facility described above for Category A  sites.

            C)  The third incentive would be to offer the actual ownership of
      the Category B site, itself, to the polluter who takes responsibility for
      the remediation of such site.  This incentive should be regarded as an
      option. Its value would depend on  the location of the contaminated site
      and the estimated value of the site after remediation.

            D)  A fourth incentive, which should also be regarded as an
      option, is that in circumstances where a polluter is offered the
      ownership of a Category B site which he elects to remediate, he could
      also be offered a generous, long-term real property tax abatement.  This
      would enhance the economic value of the remediated land.

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      3)  Regardless of whether a private sector polluter or the Mexican
government or a political subdivision thereof undertakes the responsibility
for remediation of a Category 6 site, a tax increment district, as described
above for Category A sites, should be created encompassing properties around
such site. In this case, however, the incremental property tax payments from
such Category B tax increment districts should be made into the Fund to
increase the amount of money in the Fund. In this regard, it should be noted
that once an annual stream of incremental property tax payments is regularly
being made into the Fund, this revenue stream can be capitalized by the
NADBank through the issuance of debt securitized  by such revenue streams.
Thus, even small annual incremental property tax  payments from Category B
tax increment districts can have a significant, near-term  effect on the amount
of monies available for Category B site remediation.

      4)  In conjunction with Category B site remediation efforts,
consideration should be given to the prioritization of sites for remediation.
Sites which pose acute threats to public health should always have highest
priority.  But in circumstances where sites do not pose an acute threat to
public health, consideration should be given to ranking the sites on the basis
of their post-remediation economic value. There would be two benefits to this
approach. First, this would naturally increase the  value of the incentives
described above  for private sector polluters, to undertake the remediation of
Category B sites.  Second, this would also increase  the revenue potential of the
proposed tax increment districts which has the further effect of increasing
the amount of monies in the  Fund available for Category B site remediation.
      In summary, the Committee believes that the hazardous waste
enforcement efforts of SEDESOL and the degree to which it is cooperating with
EPA will significantly reduce the hazardous waste problem along the border.
The Committee suggests that such efforts can be strengthened and augmented
by the development of a financing program which would create strong
                                   10

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incentives for polluters to undertake the remediation of the hazardous waste
                                *
sites, as well as a strong disincentive for not undertaking such remediation.
Such a financing program would include:

      * Loans from the NADBank to identified polluters, who elect to
      remediate sites to which they have been causally linked, at the lowest,
      unsubsidized interest rates for terms of up to fifty or even one hundred
      years.

      * The creation of a General Remediation Fund into which polluters
      would pay who could not be causally linked to individual sites; and the
      use of such Fund as the primary financial resource for the remediation
      of sites which  cannot be causally linked to specific polluters.

      * The creation of tax increment districts  encompassing the property
      benefiting from the remediation, and the  use of the incremental tax
      proceeds to buy down the principal on NADBank loans to remediating
      polluters or to support the efforts of the General Remediation  Fund.

      * The creation of a series of financial incentives for private sector
      polluters to undertake the remediation of hazardous waste sites to which
      they either could, or could not, be causally linked.

      The Committee believes that such a program, incorporating the above
elements,  will greatly facilitate the remediation of hazardous waste disposal
sites along the  Mexican.border, especially when viewed against alternatives
which involve government remediation at greater expense and at far more
onerous financial terms to offending polluters.
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